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Friday, February 1, 2013

Pricing out the middle-class



All of us living and working in Penang thank our lucky stars that we managed to get onto the property ladder. Many of us did it because we inherited a house from our grandparents or parents. Some did it with help from venerable parents or simply because we did not have to support them too much financially. 

Those of us above 40 years old managed the steep climb because we took out big loans that we will be paying for the rest of our lives. If you are a young person in a professional job, please think seriously about buying in Seberang Prai, Kulim or Sungai Petani! Unless you inherit, you will probably never be able to buy a bungalow or semi-detached house on Penang Island!

As we are already in the unofficial election campaign period, which can last anytime from one month to three months, every issue has become campaign fodder. Readers will have to be patient as madness takes hold of otherwise quiet politicians when addressing the issue of property prices and development. 

In fact, what they really want, as Dr Mahathir Mohamad said recently, is no change. Instability or a weak government is bad for development especially the construction industry.

There are four reasons for the current situation where property prices seem completely out of reach of the middle-class. One of them has to do with history; and all others with the contemporary situation.

In 1786 when Captain Francis Light took possession of the island of Penang, he had declared that the trading port would not levy duties and taxes on trade. Without any real support from the English East India Company based in Calcutta, Light went about raising revenue by giving out all sorts of monopolies on the supply of nipah, opium, arrack, gaming and even on the supply of pork! 

To provide incentives for settlers to clear the land, he practiced a liberal land policy giving out freehold leases on the priviso that the lease-holder clear the land for habitation and commercial agriculture. 

When Sir Stamford Raffles arrived with Governor Dundas in 1805, the colonial secretary was shocked at the results of Light’s land policies. It was quite literally impossible to build a road system without having to cut across or go around private land. This meant infrastructure and other public amenities could only be built at high cost to the government. 

Some two centuries later, all independent Penang state governments have had to “manage” the state with small, scattered and un-strategic land-banks!

‘Place identity’ very strong

Whilst this legacy has created a fractured and oftentimes inefficient management of land, it also spawned a very active civil society as small private property ownership often engenders a higher degree of public participation. At least that is the case of Penang where ‘place identity’ is very strong and all communities ‘own’ land for purposes of social meetings, religious worship and, when necessary, share public spaces during cultural festivals. 

Light’s Penang gave rise to an active civil society whilst Raffles’ later experiment in Singapore created the ideal trade and financial emporium. This historical fact not only serves to showcase the limited role of its successive state governments but also why this ‘situation’ is magnified by civil society activism. 

So, for once, not everything revolves around Lim Guan Eng or is the direct cause of Guan Eng’s four years as chief minister no matter how potent his detractors think the Penang chief minister is!

The next three reasons have to do with the contemporary situation, some of which has to do with governmental policies whilst others are beyond the government of the day.

azlanLet’s start with the demand side of the story. There is a great need for middle-class housing, which is a good sign because it means there is an expansion of the middle-class. But this may not be the real situation. What the Malaysian middle-class defines as middle-class homes is in reality beyond their reach because in terms of purchasing power, they are not ‘middle-class’. 

A recent study shows that some 90 percent of Malaysians cannot afford homes more than RM300,000. To my mind, middle-class homes defined as a house or apartment that meets middle-class aspirations - about 2,000 sq ft with three bedrooms - will cost between RM300,000 to RM450,000 in real-estate hot-spots like Kuala Lumpur, Petaling Jaya, Johor Baru, or Penang Island. 

What the government is loath to admit is that the Malaysian middle-class is not middle-class at all but at best lower-middle-class. If the equation is made based upon the US yardstick whereby housing is affordable if loan repayments does not constitute more than 40 percent of the individual’s income, most Malaysians simply cannot afford a middle-class home. 

In short, we are an economy in transition with traces of the low-cost and low-wage economy still very much part of the big picture!

Whilst it is the hobby-horse to blame the developers - oftentimes labelled corrupters of the political system and all-round bad guys - we also have to realise that no private firm goes into property development to do charity. If the piece of land is in the city centre, it may cost up to RM100 million to acquire two acres in the KLCC area. 

It does not make sense to put all the capital out there and then build low-cost or even medium-cost housing. What this means is that more and more land around the city centre gets converted into high-density luxury towers with wealthy Malaysians, expats and oversees investors snapping them up. 

PJ is suddenly very ‘central’

Twenty years ago, Petaling Jaya was considered quite far away from town but today property prices here have sky-rocketed and as urban centres spring up all around it, PJ is suddenly very ‘central’. As a result, demand increases and the people who have property refuse to sell as they will have to move further away, and property prices continue to rise. 

To make things worse, materials cost more now with China, India and the world’s expanding middle-class all conspire to make their dreams come true! They are all after the same tiles, marble, steel; and raw material cost have gone up exponentially in the last decade alone!

This leaves the government. In the past 40 years, the government have rightly prioritized the lower income groups and Malaysia’s working class. Land in rural areas were cleared and planted with palm oil. Felda is probably the world’s most successful rural development programme creating two generations of forward movement for landless Malaysians. 

In the urban areas, UDA made sure that the bumiputeras, who only constituted 20 percent of the urban population in 1957, were not squeezed out of their small urban settlements. All governments at federal and state level concentrated on the provision of “low-cost” housing. 

Malaysians must remember that at independence, there was a huge “floating” community of squatters. Slowly, new villages turned into townships. Jinjang, Kepong, Cheras and Raub are some of the more famous ones. In Penang, low-cost housing were built to house an explosion of factory workers, people relocated for key state development projects like Komtar, the Bayan Lepas Free Trade Zone, Mak Mandin industrial zone and many more development projects.

Till about the mid-1990s, increasing income from manufacturing jobs meant that the middle-class in Malaysia could somehow adjust to the rising property prices. It was still possible for a civil servant to purchase a terrace house in Seberang Jaya on a single income in the 1980s. 

All this was to change after the Asian Financial Crisis when Malaysia was forced to relax regulations abolishing, for example, property gains tax. The extra money sloshing around the global economy ushered in the age of cities, where investors were looking for safe bets. 

Malaysia, meaning KL and Penang, was a good draw. We were cheaper than Hong Kong, Singapore or even Bangkok. We were stable and, in the case of KL, offered very good return on investments. By the mid-2000s, foreign buyers entered the market with gusto. Ultimately, the age of the super-condo arrived with RM2 million condominiums or RM10 million bungalows.

Lastly, beyond the demand and supply issues, Penang faces a particularly acute property squeeze because wages here are at least 2.5 times lower than the Klang Valley. It is also a much older settlement with old families holding on to properties and not releasing them into the market. 

Plus, with very limited government-owned land banks, most state governments are devoted to providing low-cost homes. They have to take care of the most vulnerable in society entrusting the rest to the tender mercies of the market!

For those of us on the short end of the stick, we have either come to terms with the reality that we will go to our graves owing the banks money or can only look to inheriting something from our parents. BN, which ruled the state for 55 years, is very much a a part of both the good and not so good outcomes. 

No game-changing idea

What is particularly disappointing is that there does not seem to be a game-changing idea. Is the government bold enough to allow, for example, development by cloud-sourcing? 

In New York, communities have come together to raise capital and purchase land for development that meets their needs. In Singapore, the government plays the role as benevolent developer - creating a property-owning democracy where citizens can get on the property ladder based upon their income levels.

More importantly, we want to churn out and expand the middle-class, hence it is important not to forget the working class by consigning them to low-cost housing, most barely big enough for a family of three! Between 450 sq ft to 600 sq ft, conditions here are so cramped that it is social problems by design. 

Again Singapore leads here with their integrated communities around their HDB flats. In short, please think out of the box and think around it to come up with solutions and not just diatribes against your political opponents. For goodness sake, the problem is bigger than Lim Guan Eng!


NEIL KHOR completed his PhD at Cambridge University and now writes occasionally on matters that he thinks require better historical treatment. He is quietly optimistic about Malaysia's future.

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